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Apple Shares Fall On Disappointing – Yet Massive – Earnings

Apple announced impressive third-quarter earnings on Tuesday, but still managed to disappoint investors to the tune of an 8% drop in after-hours trading.

The Cupertino, Calif.-based tech firm reported a 33% increase in revenue from a year ago, to $49.6 billion, as well as quarterly profit of $10.7 billion (or $1.85 per share). But sales of its market-leading iPhone fell short of high analyst predictions despite the company shipping 47.5 million iPhones.

“We had an amazing quarter, with iPhone revenue up 59 percent over last year, strong sales of Mac, all-time record revenue from services, driven by the App Store, and a great start for Apple Watch,” Apple CEO Tim Cook said in a statement. “The excitement for Apple Music has been incredible, and we’re looking forward to releasing iOS 9, OS X El Capitan and watchOS 2 to customers in the fall.”

Cook’s reference to Apple Music pointed to a new service that he hopes will emerge triumphant – or at least competitive – in a rather crowded field already home to Spotify, Google Play Music, and Rdio. Music is now available on iOS and OS X devices as well as Windows. An Android app, itself a rare move for Apple, will be released this fall.

But what gained the most attention on Tuesday was probably a key omission: Apple Watch sales. Apple released the Watch to much fanfare earlier this year, but instead of breaking out sales figures in its third-quarter earnings report, the first after the Watch went on the market, the company opted to lump it in with its “Other” category. “Other,” which also includes Apple TV, the iPod, and Beats headphones, saw sales jump by about $1 billion in the third quarter, likely thanks to the new addition.

Given how widely Watch prices vary – the low-end models start at around $350-400 while the high-end models can run about $10,000 – it’s difficult to translate an estimated revenue figure into the number of units shipped.

Market-watchers have been wary of that reticence to release sales data on the Watch, the company’s most prominent product roll-out in years. But, on a conference call with analysts, Cook said that “sales of our watch did exceed our own forecasts.” And Apple’s Chief Financial Officer, Luca Maestri, told the Associated Press that Watch revenues were actually “well over” the difference in “Other” sales between the third and second quarters.

Apple’s success could be, paradoxically, helping feed investor disappointment. As its numbers continue to impress and the iPhone maintains its dominance of the smartphone market, analysts have boosted their forecasts – setting the stock up to fail if it falls short, even slightly. That seems to be what happened with Tuesday’s earnings report.